UPDATE 2-Dillard's profit falls, hurt by sales slump

(Adds shareholders' actions, paragraph 5-6)

NEW YORK, March 19 (Reuters) - U.S. retailer Dillard's Inc (DDS.N: Quote, Profile, Research) posted lower quarterly profit on Wednesday on lower sales on the same day a shareholder group set the stage for a potential showdown at its May annual meeting.

Fourth-quarter earnings fell to $47.3 million, or 63 cents a share, from $155 million, or $1.90 a share, a year earlier, the company said.

Sales dropped to $2.2 billion from $2.4 billion in the year ago period, which included one more week of sales.

"Clearly, our performance for the quarter and the year was disappointing," Chief Executive Officer William Dillard II said in a statement. "We simply did not achieve the level of sales necessary to produce more acceptable results."

Earlier on Wednesday, a Dillard's shareholder group said it planned to nominate four people for election to the retailer's board.

Hedge fund manager Barington Capital Group LP, which represents investors that own about 5.6 percent of Dillard's stock, said the retailer's "vast value potential is not being realized" and that its current 12-member board includes directors with an average tenure of nearly 20 years.

Dillard's said in a statement that Barington's notice would be sent to its board's executive committee for review, and added that it "remains committed" to improving operational performance.

Dillard's owns a 50 percent interest in construction company CDI Contractors LLC and accounts for its interest in CDI by the equity method. On Wednesday, the company said that it found after a review of CDI's internal financial records that CDI had recorded profit on projects in excess of what CDI had previously reported to Dillard's.

Because the cumulative effect of this error would be material to operating results for 2007, Dillard's said it will restate opening retained earnings as of Jan. 29, 2005 for all periods prior to the fiscal year ended Jan. 28, 2006. (Reporting by Sue Zeidler, editing by Leslie Gevirtz)